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Enterprise Software Lessons: Does Freemium Really Works?

Yesterday I had a very interesting discussion with a friend about the different pricing models in the new generation of enterprise software. Obviously, the bulk of the discussion centered on the viability of fermium models in the enterprise. Having written about this topic before, I decided to post some content from a previous blog post that capture some of my ideas about this topic.

Despite the proven effectiveness of the fermium pricing model in internet products, enterprise software vendors are just beginning to experiment with those models. Certainly, in the most traditional enterprise software circles, the term fermium is associated with “you have no idea of how to make money with your product” Below are some of the most common arguments that are typically presented against the fermium model

  • Customers should pay for the product…
  • What’s wrong with offering the software in a trial period?
  • Are customers going to take us seriously?
  • Are people going to try to gamble the system and take advantage of the free offer?
  • Are customers likely to upgrade after using the software for free?
  • How does this change our sales model?

The arguments above are not only valid but certainly expected. If you think about it, until now freemium models have, for the most part, been associated with consumer technologies in which user volume is sometimes more important than the revenue model. When it comes to enterprises, the old mindset of long sales cycles, proof-of-concepts or trial periods, and armies of nicely dressed sales guys still prevails when it comes to enterprise software.

Despite the previous arguments, we are seeing some very inspiring examples of enterprise software companies relying on freemium models to attract large numbers of customers. ZenDesk, Box, and Atlassian are just some examples of companies that have challenged established vendors in the enterprise software space and reached massive levels of customer adoption by leveraging freemium as the center of their revenue model. These companies are capitalizing on a very unique time.

We are living in really exciting times in enterprise software. The emergence of mainstream computing models such as cloud infrastructures and virtualization, the increasing presence of alternative connected devices as well as the new wave of social communication methods are fomenting unprecedented levels of innovation in the space and are allowing small companies to challenge established vendors such as SAP, Oracle, IBM or Microsoft. In my opinion, these technical revolutions are also opening the door for flexible pricing and commercialization mechanisms to be adopted in the enterprise software world.

A freemium pricing model definitely offers a lot of interesting opportunities in the enterprise software space but there are some serious factors that need to be taken into consideration before adopting it.

Where Freemium Works

Having a large number of customers is always exciting and can definitely help position your company as a leader in a specific market. However, if that customer adoption comes at the price of real revenue you better have a very solid strategy about how to monetize your product. In the consumer world, there are some established mechanisms such as advertising that offer a clear path to monetization once you have an established user base. That equation is not as clear in the enterprise world in which, most of the time, you have to find a way to have some of your customers pay for your product regardless of your user adoption.

In that sense, you must do a very detailed analysis of the characteristics of your product and market to make sure it is a good candidate for a freemium pricing model. Based on my experience, I can list a few factors that need to be present in order to have a chance of success with a freemium pricing strategy:

  1. Great product quality: This one is very simple, if you want customers to pay for your product after using it for free, your product should offer an impeccable experience that justifies the upgrade.
  2. Large market: The only reason for embracing a freemium model is to have a large number of customers using your product. In that sense, the market has to be big enough to give you access to tens of thousands of customers and/or millions of users.
  3. Scalability and monetization unit: Number of users, servers, devices, api calls, storage capacity, etc are some of the metrics you can use to model your pricing structure. In any case, you have to have one or various units to scale your product from a free base.
  4. A broad spectrum to upgrade the product: When going freemium, you have to assume that a significant percentage of your users are just not going to upgrade from the free version in the current version of the product. Even if your target market is large in terms of the number of potential customers, you have to make sure is also broad enough that will allow you expand onto new areas with new products or features that will keep expanding your user base and number of paying customers,
  5. Simple to install and use: In addition to providing a great experience, your product needs to be simple to install and deploy within an enterprise environment.
  6. Simple pricing structure: If you expect customers to give you money after using your product for free you have to provide a pricing structure simple enough that won’t impose major challenging from the budgeting perspective.

In addition to the aforementioned points, there are other elements that could make your enterprise technology an ideal candidate for a freemium pricing structure. Intrinsic virality or the ability to building a strong user community around the product are probably some of the hardest aspects to accomplish but if you get there your product will be in a position to experience high and consistent levels of growth.

The Advantages of Freemium

If the conditions are created, a freemium pricing model can offer very tangible advantages over traditional pricing structures. Here are some of the ones that come to mind:

  1. Large customer base: Having a large number of happy customers can be one of your biggest assets, which will open the door for all sorts of interesting opportunities.
  2. Different sales cycle: Freemium can improve your sales cycle by only dealing with customers which are already using your product vs. having to start with a traditional enterprise sales cycle.
  3. Bring freedom to IT: I know it sounds cheesy, but I can’t avoid feeling satisfaction knowing that offering your product for free empowers IT users to make their own decisions and try to use the best products for the job without having to play IT politics at the very beginning of the technology acquisition process.

Regardless of the clear advantages and undeniable hype around freemium pricing, there are still some serious considerations in order to determine whether it will be successful in the enterprise. If you are founder CEO considering embracing a fermium model in your product, I will encourage you to do some serious analysis about the pros and cons from your specific commercialization model. In the end, once you make the commitment to offer your product for free you might not be able to rollback without damaging your brand.

What do you think? Does freemium work in the enterprise?

 

 
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Posted by on July 6, 2012 in Uncategorized

 

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Does Enterprise Software Needs Sales People?

The sales staff is one of the traditional elements of enterprise software companies that has been heavily questioned by the new generation of companies in the space. A lot has been written about the new software acquisitions models in the enterprise and how companies today don’t need to rely on traditional sales mechanisms. Companies like Atlassian claim they have acquired tens thousands of customers without a single sales executive and passionately promote that model as the cornerstone of the new generation of enterprise software.

These days, enterprise software sales staffs are associated with the old boys, the Oracles, IBMs and SAPs of the world. Sales guys are not cool, they think about money and not about changing the world and they are expensive. These days, enterprise software can spread viraly, purchased with a credit card on subscription basics. Factoring all this, do we really need sales people in an enterprise software startup?

The answer is: ABSOLUTELY YES!

I have thought about this problem for a long time and tried different models. At this point, I couldn’t be blunter about my opinion on the subject. To achieve scale, an enterprise software startup MUST have a sales staff. What we do need is a different type of sales guys and new and innovative sales models.

Let me try to explain.

While you can certainly establish an enterprise customer based without a sales staff, it’s almost impossible to achieve a decent scale following that model. Selling to large enterprises can be a lengthy and complex process that needs the patience and dedication of a sales executive. When selling to large enterprises, you need to deal with procurement departments that have been trained to get any possible discounts in your software, IT departments that tend to be adverse to changes and new technologies and rigorous compliance and policies that most of us find ridiculous. Having a solid sales staff can and will help to win those large accounts that, otherwise, will require the full attention of the management team.

Having said all that, I do believe that effective enterprise software sales are fundamentally different from the traditional models. Market phenomenon such as globalization and economies of scale, technology movements like software as a service, software distribution models such as app stores, cultural movements such as the “consumerization of the enterprise” are just some of the factors that we can leverage in the new generation of enterprise software sales. As an enterprise software company, there are a few tips that might help you improve the dynamics of your sales organization in this new world.

Leverage Fremium Models

As I mentioned in a previous article, fermium models do work in the enterprise. A fermium model will help you increase your customer population while allowing your sales team to focus their attention on those customers with the potential to convert to a paying model.

Selling to the Buyer

One of the main problems in enterprise software is that the people testing the product are not the ultimate buyers. Involving the decision makers early on in the evalution process will do wonders to expedite your sales.

Make it Simple

I know it sounds cheesy but, as an enterprise software company, you need to obsess to make your software as easy to acquire as possible. A simple and transparent sales model will streamline the software acquisition processes for your customers.

Disclose Pricing

Complimentary to the previous point, part of making a sales process as simple as possible is to provide your customers with all the information they need in order to evaluate the product. Pricing is one of those aspects that a lot of companies tend to only disclose after they have gotten in contact with the potential buyer. That’s completely ridiculous, disclosing your pricing model will make it easy for your customers to evaluate your software and will avoid unnecessary negotiations.

Find a Champion in IT

In any enterprise software sales process, there is a huge difference between sales that require the involvement of the IT department and the ones that don’t. Rightfully so, IT groups tend to be extremely conservative when adopting new technologies and can be very demanding from the software compliance and policy standpoint. However, IT groups can also be your biggest champion if the value proposition is clear enough. If your sales process requires IT involvement, my advice would be to get then involved at the very beginning of the process and find a few champions within the IT organizations that can help you navigate the complexities of the process.

 

 

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Microsoft-Yammer Deal is the Florence of Enterprise Software

Florence and Siena are the two Italian cities that had the most impact in the Italian renaissance. Even though the movement itself was originated in Tuscany, Florence is often associated with the expansion of the  renaissance movement throughout that Italian peninsula. Is we can, for a minute, trace a parallel between the rebirth of  enterprise software and the Italian renaissance then Microsoft’s Yammer acquisition can become the Florence of enterprise software.

During the last few days we’ve heard strong rumors that Microsoft will be acquiring enterprise social media pioneer Yammer for a price between $1B-1.6B. As a matter of fact, if the rumor holds true, the deal is likely to be announced in the next few hours. Yammer provide enterprise social networks capabilities to thousands of organizations across the globe and has a very strong presence within Fortune 500 companies. After a few financing rounds, Yammer’s valuation is reported around $500M but the value is far from directly correlating to revenue numbers which is reported to be around $20M.

Regardless of your opinion related to the terms of the transaction, there is no doubt that, to the day, Yammer’s acquisition represents the most important moment in the history of this new generation of enterprise software. While this new movement has already experienced outstanding successes such as Jive’s IPO or the acquisitions of Rightnow, Success Factors and Taleo for multi-billion dollar valuations, Yammer’s acquisition is set to have a more profound impact in the enterprise software industry.

Why is that?

Yammer’s influence in the new enterprise software movement goes way beyond its technology contributions and expands onto the commercialization, economics and adoption models of enterprise software technology. If you think about it,  Jive’s IPO had very little influence in the new enterprise software models and SAP’s and Oracle’s acquisitions of Taleo, Rightnow and Success Factors were strongly validated by revenue models and traditional customer acquisition processes.

Yammer, on the other hand, has established a strong enterprise customer base by challenging a large number of the traditional enterprise software concepts. Microsoft’s Yammer acquisition strongly validates that the economics and dynamics of enterprise software are changing. With this deal, Microsoft is telling the world that the old school of enterprise software might benefit from a few lessons from the new boys:

  • Market share matters as much as revenue: As in the consumer market, enterprise software valuations can be correlated to market share rather than actual revenue. While Yammer’s revenue numbers might not be impressive, their number of customers and the dependency those customers have on Yammer’s technology is a great asset for Microsoft.
  • Fremium works: Yammer was one of the pioneers of the fermium pricing model for enterprise software. Microsoft’s acquisition validates that these new type of pricing models can be very effective within enterprise customers.
  • Sexy and simple interfaces win: Yammer is not a super feature rich product and its main value proposition is a very simple one: improving the communication within the enterprise. However, Yammer accomplishes this goal by providing a super sexy, incredibly intuitive and astonishing simple interface. Compared to most enterprise software products, Yammer’s interface might look ridiculous but, as always, we should remember that in this industry simple and open tends to win.
  • Partnership matters: If you have been following the market, Microsoft acquisition of Yammer should not come exactly as a surprise. Since last year, Yammer and Microsoft have partnered to expand SharePoint’s social networking capabilities with Yammer. This acquisition is a testimony that long term partnerships can evolve into successful outcomes for both parties.
  • Mobile-First Matters: Mobile devices are one of the main channels by which people use Yammer. By acquiring Yammer, Microsoft is acknowledging that mobile-first consumers are also relevant in the enterprise.

You can probably tell I am super excited about Microsoft’s Yammer acquisition. I believe Microsoft will get an all-star team head by David Sacks and a rock solid product and Yammer directly benefits from Microsoft’s dominant presence in the enterprise software world.

What do you think? Is Microsoft-Yammer deal as important as I think it is? Is $1.2B too much? ;)

 
 

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The Half Ass Consumerization of the Enterprise: Flexible Pricing Models

In a previous post, I detailed some of the main elements needed to transform the ”consumerization of the enterprise” into a mainstream movement. This time, I would like to focus on one of the most important aspects of the new generation of enterprise software: pricing models.

For years, selling software to enterprises has been a privilege of the traditional enterprise software vendors. Armies of professionally-dressed, not very tech savvy sales people and ridiculously long sales processes is what we’ve known is required to convinced organizations to adopt your software. Those dynamics has drastically change in recent years with the initial renaissance we are experiencing the enterprise software industry. Technology movements like software as a service and efficient software delivery mechanisms such as application stores have provided organizations with the necessary flexibility to embrace the new generation of enterprise software packages. However, there is an essential ingredient that is required to simplify the software acquisition processes in the enterprise: flexible pricing models.

Capitalizing on the more efficient software distribution models at our disposal, the new generation of enterprise software has adopted new pricing structures based on the combination of two fundamental elements: subscription-based and fermium models.

New Enterprise Software Price Model = Subscription-based + Fremium

This formula seems to make perfect sense, whether the fermium model allows organizations to adopt the software at no cost the subscription based structure enables them to scale as the use of the software increases. I talked about the advantages of the fermium model in the enterprise in a previous post. While both the fermium and subscription-based elements should be foundational to new enterprise software packages are far from being sufficient to convince customers to adopt your software. Thinking otherwise, is clearly underestimating the complexities of the software acquisition processes in the enterprise.

At the end free is just free and cheap is just cheap ;)

Establishing the correct pricing model for you and your enterprise customers is far from being a trivial endeavor. I’ve spent a lot of time thinking about this problem and I still manage to make a few rookie mistakes. While there is no direct pricing formula that guarantees success, there are a few key recipes that any successful enterprise software price model should include:

  • Find a way to acquire customers at a minimum cost: If you are going to offer your software for free, it is vital you find different engines of growth to acquire customers at minimum expenses. See my post about engines of growth in enterprise software for more details.
  • Provide a clear conversion unit and value: In order to convert your fermium customers to a paying model, you need a clear unit of measure and an easy transition path. Additionally, it is important that there is a clear value proposition for customers to upgrade to a paying edition.
  • Answer all questions and mitigate risks up front: If you want enterprises to give you money for your software you need to provide a clear and easy way to answer the traditional concerns with enterprise software packages in areas such as security compliance and other traditional policies in the enterprise IT.
  • You are going to need a sales staff: The no sales guy organization is one of those fantasies in the new generation of enterprise software that has no foundation. If you want to acquire big customers and are serious about becoming a winner in the enterprise software world, at some point you are going to establish a sales organization that can help navigate the complexities of the enterprise software process.

Certainly the elements listed above are not exclusive but I believe you will find most of them as  part of any solid enterprise software pricing model.

 
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Posted by on June 11, 2012 in Uncategorized

 

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Does Freemium Work for Enterprise Software?

A couple of weeks ago we made an important decision to offer our Moesion product free of charge for the first 3 servers. This decision represents the final transition to embrace a “Fremium” pricing model as part of the entire Moesion platform. The interesting thing is that we decided to make the switch when our levels of customer acquisition are at their highest level since we launched. We just passed 400 customers, with just a few months since we announced the product.

Looking at that, a lot of our advisors rightfully questioned the decision of moving from a sort-of-traditional enterprise software licensing structure to a freemium model in which customers can start using the product, full-featured, for free and then upgrade to a paying license.

For weeks, we’ve heard all the traditional arguments against the freemium model:

  • Customers should pay for the product…
  • What’s wrong with offering the software in a trial period?
  • Are customers going to take us seriously?
  • Are people going to try to gamble the system and take advantage of the free offer?
  • Are customers likely to upgrade after using the software for free?
  • How does this change our sales model?

The arguments above are not only valid but certainly expected. If you think about it, until now freemium models have, for the most part, been associated with consumer technologies in which user volume is sometimes more important than the revenue model. When it comes to enterprises, the old mindset of long sales cycles, proof-of-concepts[E1]  or trial periods, and armies of nicely dressed sales guys still prevails when it comes to enterprise software.

Despite the previous arguments, we are seeing some very inspiring examples of enterprise software companies relying on freemium models to attract large numbers of customers. ZenDesk, Box, and Atlassian are just some examples of companies that have challenged established vendors in the enterprise software space and reached massive levels of customer adoption by leveraging freemium as the center of their revenue model. These companies are capitalizing on a very unique time.

We are living in really exciting times in enterprise software. The emergence of mainstream computing models such as cloud infrastructures and virtualization, the increasing presence of alternative connected devices as well as the new wave of social communication methods are fomenting unprecedented levels of innovation in the space and are allowing small companies to challenge established vendors such as SAP, Oracle, IBM or Microsoft. In my opinion, these technical revolutions are also opening the door for flexible pricing and commercialization mechanisms to be adopted in the enterprise software world.

A freemium pricing model definitely offers a lot of interesting opportunities in the enterprise software space but there are some serious factors that need to be taken into consideration before adopting it.

Where Fremium Works

Having a large number of customers is always exciting and can definitely help position your company as a leader in a specific market. However, if that customer adoption comes at the price of real revenue you better have a very solid strategy about how to monetize your product. In the consumer world, there are some established mechanisms such as advertising that offer a clear path to monetization once you have an established user base. That equation is not as clear in the enterprise world in which, most of the time, you have to find a way to have some of your customers pay for your product regardless of your user adoption.

In that sense, you must do a very detailed analysis of the characteristics of your product and market to make sure it is a good candidate for a freemium pricing model. Based on my experience, I can list a few factors that need to be present in order to have a chance of success with a freemium pricing strategy:

  1. Great product quality: This one is very simple, if you want customers to pay for your product after using it for free, your product should offer an impeccable experience that justifies the upgrade.
  2. Large market: The only reason for embracing a freemium model is to have a large number of customers using your product. In that sense, the market has to be big enough to give you access to tens of thousands of customers and/or millions of users.
  3. Scalability and monetization unit: Number of users, servers, devices, api calls, storage capacity, etc are some of the metrics you can use to model your pricing structure. In any case, you have to have one or various units to scale your product from a free base.
  4. A broad spectrum to upgrade the product: When going freemium, you have to assume that a significant percentage of your users are just not going to upgrade from the free version in the current version of the product. Even if your target market is large in terms of the number of potential customers, you have to make sure is also broad enough that will allow you expand onto new areas with new products or features that will keep expanding your user base and number of paying customers,
  5. Simple to install and use: In addition to providing a great experience, your product needs to be simple to install and deploy within an enterprise environment.
  6. Simple pricing structure: If you expect customers to give you money after using your product for free you have to provide a pricing structure simple enough that won’t impose major challenging from the budgeting perspective.

In addition to the aforementioned points, there are other elements that could make your enterprise technology an ideal candidate for a freemium pricing structure. Intrinsic virality or the ability to building a strong user community around the product are probably some of the hardest aspects to accomplish but if you get there your product will be in a position to experience high and consistent levels of growth.

The Advantages of Freemium

If the conditions are created, a freemium pricing model can offer very tangible advantages over traditional pricing structures. Here are some of the ones that come to mind:

  1. Large customer base: Having a large number of happy customers can be one of your biggest assets, which will open the door for all sorts of interesting opportunities.
  2. Different sales cycle: Freemium can improve your sales cycle by only dealing with customers which are already using your product vs. having to start with a traditional enterprise sales cycle.
  3. Bring freedom to IT: I know it sounds cheesy, but I can’t avoid feeling satisfaction knowing that offering your product for free empowers IT users to make their own decisions and try to use the best products for the job without having to play IT politics at the very beginning of the technology acquisition process.

Regardless of the clear advantages and undeniable hype around freemium pricing, there are still some serious considerations in order to determine whether it will be successful in the enterprise. We are extremely happy with our decision and already seeing some positive results but I will encourage you to do some serious analysis before adopting a freemium pricing model if you are selling to enterprises. In the end, once you make the commitment to offer your product for free you might not be able to rollback without damaging your brand.

What do you think? Does freemium work in the enterprise?

 
1 Comment

Posted by on April 17, 2012 in entrepreneurship

 

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